Political Science

I’ve covered these ideas before a number of times, but now the Chinese slowdown is common knowledge, so let’s put them in one place:

1. You can’t invest 45-50 percent of your gdp very well forever.  It’s amazing how long China’s run has been, but it is over.  The quality of their marginal investments is now low and that means their growth rate will be much lower too.  The low hanging fruit is gone, at least for the time being.  They might later on resurrect some new low-hanging fruit through institutional reform, we’ll see if they end up stuck in the middle income trap but right now they are at a sharp discontinuity.

2. There is no simple way to switch to a “consumption-driven” economy without the growth rate both falling and staying permanently lower.  Structural reforms are absolutely called for, but in this context they represent a surrender to a lower rate of growth and thus they are especially difficult to pull off in a politically sustainable manner.

3. The Chinese have been growing at ten percent or nearly ten percent for about thirty-five years.  More than a generation of Chinese is used to treating the risk premium as if they don’t have to worry about it.  I shudder to think what economic and also political decisions have been made on that basis.

4. The Chinese economic response to the dwindling of their low-hanging fruit is sharp rather than smooth because there is a sudden revision of expectations, as people realize the risk premium isn’t zero after all.  And seeing the others see that causes the new set of beliefs to spread pretty quickly.  That is a very painful process for a macroeconomy, and it is not well captured by simple AD-AS analysis, although of course it has implications for both AD and AS.

5. I would not so quickly infer that the Chinese government is stupid when it comes to economics.  It is true their actions do not correspond to what professional economists would recommend.  But they are painted into a very unpleasant corner and have lots of interest groups to feed.  Their observed response is possibly explained by some kind of public choice-constrained, nested game, internal conflict-driven seventh-best response.  They were smart a few years ago, and they are still smart now.  That doesn’t mean they will end up doing a good job.

6. Avoid mood affiliation!  You can be a pessimist about the Chinese recession now without being a) a pessimist about China in the longer run, or b) a pessimist about Chinese political stability.  Those are separate albeit related questions, and you are not forced to have the same mood response to all of them.

Keep this primer on hand at all times.  It is more useful than trying to twist the C + I + G tautology into a series of causal statements about China.

A mistake by representatives of the Business Loop 70 Community Improvement District means a sales tax increase the district needs to thrive will require approval by a single University of Missouri student.

On Feb. 28, Jen Henderson, 23, became the sole registered voter living within the community improvement district, or CID, meaning she is the only person who would vote on a half-cent sales tax increase for the district.

Henderson says she feels negative about the tax idea, “but has not made a decision about how to vote. Henderson said her concerns include vague project outlines, Gartner’s pay, Business Loop improvements she said will help businesses but not nearby residents and how an additional sales tax would affect low-income people purchasing groceries and other necessities.”

For the pointer I thank Austin Vernon.

There is a new opinion of sorts:

The Democratic Party platform now calls for a $15 per hour national minimum wage for all hourly workers after delegates voted in an amendment proposed by progressive activists during the Democratic National Committee Meeting here on Friday.

The pointer is from Conor Sen.

Kieran Healy has a new paper on that topic (pdf), by the way a paper with a very short title (but this is a family blog).  Here is his opening paragraph:

Nuance is not a virtue of good sociological theory. Sociologists typically use it as a term of praise, and almost without exception when nuance is mentioned is is because someone is asking for more of it.  I shall argue that, for the problems facing Sociology at present, demanding more nuance typically obstructs the development of theory that is intellectually interesting, empirically generative, or practically successful.
And yet I find this paper has a lot of…nuance.  But of course Healy is consistent, it is “Actually Existing Nuance” he is railing against…

Economists are familiar with the use of monetary and fiscal policy to stimulate or restore nominal gdp, or other measures of aggregate demand if you prefer.  But China faces a bigger dilemma.  Part of its earlier pro-growth program overstimulated particular sectors of the economy, for instance construction and a variety of heavy duty state-owned enterprises.  Not coincidentally, those are the same parts of the economy which have experienced excess capacity and decreasing returns.

The more specific dilemma is this: China’s main paths for boosting its nominal gdp path also tend to stimulate or re-stimulate these overextended sectors.  Think for instance of pushing more credit through state-owned banks to favored state-owned firms.  Or consider fiscal policy.  At the margin that could mean municipal governments spending more on what they know best how to do, namely building more physical infrastructure.

Chinese stimulus, in the broad sense of that word, thus worsens previous Chinese malinvestments.  China would like to stay on a smooth ngdp growth path, but they don’t know how to do this without overextending themselves in particular sectors all the more.

It is fine to call for “reform,” but there are two extra problems.  First, most of the best reforms will lower ngdp in the short run and maybe even the medium run.  Second, the ngdp crunch may be coming more quickly than reforms can be instantiated.

Over the next months, you will read many blog posts, from other economists, about China in an aggregate demand framework.  Be wary of them if they do not appreciate this point.

Here are my earlier remarks from 2012.

Putting the immediate liquidity, debt, and asset price problems aside (ha), there is significant excess capacity on the real side of the economy.  It will be very hard to fix this problem without letting significant numbers of SOEs go under.  The central government fears the resulting unemployment, plus the SOEs are the Party’s power base.  Yet the leaders know what must be done, and the SOEs have been reformed before.  So the government is tightening the screws with more purges and censorship and power centralization, in part so they can do some SOE reform.  The chance of this working is 30-70.  One danger is that SOE reform leads to a loss of political stability.   A second and more likely danger is that reform is incomplete and China ends up full of zombie companies and banks.

Nathan Smith has a very thoughtful speculative essay on that topic. Here is one interesting bit of many:

I would tentatively envision the US experience under open borders as resembling the British and Roman cases, inasmuch as the protocols and ideals of the US polity, as well as its merely ethnic characteristics, would persist in attenuated form, but governing a much larger population would necessitate improvisational and sometimes authoritarian expedients that would cumulatively transform the polity into something quite different, even as it claimed descent from the historic constitutional polity of the United States as we know it. The illusion of continuity would deceive the subjects of the new polity, native-born and immigrant, to a considerable extent, though on the other hand there would be a good deal of lamentation and triumphalism, and only after several generations would historians be able to look back and assess the bewildering transformation in a sober, balanced way.

Certain American ideals would die of their own increasing impracticality, e.g., “equality of opportunity,” the social safety net, one person, one vote, or non-discrimination in employment. Americans might continue to feel that these ideals were right long after they had ceased to be practiced, as the Romans seemed to feel that Rome ought to be governed by its Senate long after real governance had passed to the emperors. I don’t see how public schools could adapt to a far larger and more diverse student body.

In sum:

I think the most wild-eyed predictions of the open borders optimists will come true, and to spare, but I think a lot of the forebodings of the grimmest open border pessimists will also prove more than justified.

The article is interesting throughout, do read the whole thing.

Martin Sandbu reports from the FT:

IMF research shows there is indeed more risk-sharing in federal countries such as the US and Germany. Eighty per cent of local economic fluctuations are smoothed in those countries, against 40 per cent between eurozone countries. In other words local consumption suffers only 20 per cent of any hit to local GDP (against 60 per cent for eurozone countries). Most of this smoothing, however, happens through private channels. Banks, credit markets and investments insulate disposable resources. Fiscal insurance, in contrast, only compensates for 15 per cent of local downturns in the US, and just 10 per cent in Germany. Daniel Gros has concluded that achieving US-style fiscal risk-sharing “would be of very limited usefulness” to absorb shocks in the eurozone.

The (gated) article is of interest more generally.  I look forward to Sandbu’s new book, Europe’s Orphan: The Future of the Euro and the Politics of Debt, forthcoming from Princeton University Press this October.

Berlin has said it expects to receive a record 800,000 asylum seekers this year, more than the entire EU combined in 2014, laying bare the scale of the biggest refugee crisis to face the continent since the second world war.

Whether you consider this “good news” depends on what you are comparing it to.  Most of all, we would prefer a situation where not so many people wanted asylum.  In the meantime, my fear is that this immigration will not proceed in an orderly manner, and the backlash against immigration will grow stronger yet.  I do not expect 2017 to resemble 2015; “unorthodox arrivals” to Europe were three times higher this July than last and at some point that process will be stopped, no matter what our moral judgment of the situation.

Note this:

Interior minister Thomas de Maizière warned that the Schengen zone, which allows passport-free travel across much of mainland Europe, could not be maintained unless EU states agreed to share asylum seekers.

The Schengen agreement of course has been the best achievement of immigration policy in a long time.  But can the European Union agree on a coherent asylum policy, and furthermore one which removes some of the relative burden from Germany and the UK?  Keeping relatively free immigration does in fact require a good deal of regulation, most of all in Europe, but those same governments are not always good at regulating.

Here is some bad polling news from Sweden.   Trouble is afoot in other corners too:

Authorities in Hungary said this week they would dispatch thousands of “border hunters” to arrest migrants entering the country from Serbia.

The forces, drawn from the Hungary’s police, will patrol the 175km long border with Serbia, where soldiers and labourers are building a 4m high razor-wire fence to keep out an estimated 300,000 migrants expected to arrive in the country this year.

I think of these developments as a good illustration of why an attempt at truly, fully open borders probably would, due to backlash, result in a lower level of immigration than the pro-immigration, immigration-increasing, low-skilled immigration increasing policies I favor.  But the idea of maximizing subject to a backlash constraint is unpopular in libertarian circles, let me tell you, including at GMU lunch table.  Nonetheless we are learning, I am sorry to say, that the backlash constraint is more binding than many of us had thought.

This all remains an under-reported story in many American newspapers,  Even with Donald Trump still leading in the polls, it is not understood what a prominent role images of Calais are playing in British national debate.  I don’t see all this as leading to anything good.

What is China’s Unemployment Rate? 4.1% For what month, what year? Doesn’t matter the answer is still 4.1%. That’s a slight exaggeration but for the last 3 years the unemployment rate has been 4.1% almost every month. Indeed, since 2002 the official unemployment rate has varied between 3.9% and 4.3%, an absurdly smooth series.

In contrast to the unemployment rate, China’s GDP growth rate has had massive swings. As a piece in Quartz puts it the unemployment rate exhibits an eerie stillness.

atlas_VJYtG-js@2x

A new NBER working paper uses a newly available household survey and finds a very different series–the China-UHS series shown in black below. According to these estimates China’s unemployment rate shot up to around 11% in 2002 and has been nearly that high at least until 2009 when unfortunately the new series ends.

UE Rate China

So how high is Chinese unemployment today? No one knows but it could well be closer to 10% than to 4.1%.

Keep an eye on China and don’t be surprised by the unexpected. In China it’s not just the unemployment rate that is more volatile than it appears.

It still seems quite unlikely to me that Trump survives much past Super Tuesday, much less wins anything.  Still, he has done far better than virtually anyone expected.

So in equilibrium I expect another embodiment of his ideas to surface politically, without all of the surrounding personal outrageousness.

Think of him as a trial balloon.  It’s still floating.

We might also see, for the next election cycle, further entry from rich people who mimic the outrageousness of Trump but not the particular ideas.  The signal extraction problem from Trump’s continuing float is not yet solved.

In these senses the media is not wrong to focus on him.  What he embodies — no matter how you interpret it — is what is new this election cycle.  And the multiplicity of possible interpretations make it all the more fodder for the media mill.

estimate China’s budget deficit – including local govt borrowing – at close to 10% of GDP in 2014

Source here.

One of the most common mistakes people make looking at Chinese data is distinguishing between absolute and relative data.  $3.6 trillion is a large amount of reserves in absolute terms but much smaller in relative terms.  According to my calculations, reserves relative to nominal GDP for 1997-8 Asian tigers is 23% compared to China’s current 34.7%.  However, if you compare reserves to M2 money supply the picture is much different. By that measure, China only has reserves equal to 17% of M2 versus 28% in 1997-8 Asian tigers.  Given the large demand to move assets out of China, primarily by Chinese firms and individuals it should be noted, the $3.6 trillion in reserve assets looks much smaller against the enormity of its wealth and asset base.  If Chinese investors and individuals start to feel significant concern about the RMB, the demand for foreign assets could turn into a flood rapidly if the PBOC fails to arrest the decline.  $3.6 trillion is a large number but in the world second largest economy with 1.3 billion, that should be thought of as a small $3.6 trillion.

That is from Christopher Balding.

Erik Eckholm reports:

I was startled by these calculations for New Jersey, for example: Cutting in half the number of people sent to prison for drug crimes would reduce the prison population at the end of 2021 by only 3 percent. By contrast, cutting the effective sentences, or time actually served, for violent offenders by just 15 percent would reduce the number of inmates in 2021 by 7 percent — more than twice as much, but still hardly the revolution many reformers seek.

New Jersey could reduce its prison population by 25 percent by 2021. But to do it, it would have to take the politically fraught step of cutting in half the effective sentences for violent offenders.

In other words, the real debate over how to deal with criminals has hardly begun.

The low-hanging fruit on this issue seems to be in Kentucky, Missouri, and Texas most of all.  But keep in mind another point: to the extent prison overcrowding eases, many judges will be giving longer sentences to many of the more violent offenders.

Loyal MR readers will know that I deliberately avoid a lot of topics related to political candidates, if only because they bore me and they are covered too much elsewhere.  But I did enjoy this article.  First prize goes to Carly Fiorina:

Before heading off to UCLA law school, Carly Fiorina once toyed with the idea of becoming a concert pianist.

I don’t have to tell you who comes in last